Three years after the first successful well reached the 11,000-foot-deep Haynesville shale formation in northwest Louisiana, more than 1,060 wells using new horizontal drilling and "fracking" methods are producing natural gas at record levels.

Their number could soon double. Another 930 wells are permitted and either awaiting drilling, being drilled or awaiting the complex hydraulic fracturing process that releases gas from the shale. Already, the number of producing wells is more than triple what it was a year ago.

And just last week, the federal government announced that Haynesville had become the nation's most productive gas field, surpassing the Barnett Shale in Texas.

The boom has fundamentally changed America's energy outlook. The development of Haynesville and other deep gas plays is a major factor in the precipitous drop in natural gas prices, and temporarily, at least, the exploitation of such sources has eliminated the need for the United States to import vast quantities of liquid natural gas.

It has also had a profound effect on Louisiana's economy, causing a boom in the mostly rural and poor sections of the state's northwestern quadrant and helping to ease the effects of a national recession on state coffers. The boom's effect on the state's budget has been limited, however, by a generous exemption granted to energy producers that dramatically limits the taxes they must pay in the first two years of a well's production -- usually its prime period.

The risks of 'fracking'

Meanwhile, getting to the vast reserves of natural gas far below the Earth's surface is not without risk. In particular, the extreme technologies required to "frack" rock layers and reach the gas create byproducts that have sparked fear of water contamination. Drilling can also lead to gas leaks and accidents, and some scientists believe that the upsurge in fracking is a factor in recent earthquake "clusters."

Still, the drilling boom in Louisiana is occurring with little of the controversy over potential environmental problems that fracking is spawning in communities in Pennsylvania, New York and West Virginia located above the also-rich Marcellus shale formation.

In particular, questions have surrounded the industry's practice in Pennsylvania of sending radiation-contaminated water from gas wells to sewage treatment plants, whose effluent -- still containing radiation -- is returned to rivers that provide drinking water. That practice has not been seen in Louisiana.

The Haynesville shale is a fine-grained rock made up of mud and organic sediment deposited more than 150 million years ago in what was then shallow ocean water. It is prized for bubbles of natural gas created by the combination of decomposing organic material, pressure and heat.

Scientists have long known the gas was there, but only recently devised a cost-effective method for extracting it.

Getting to the gas

To get to the gas, a well is drilled down into the shale layer and then curved to a horizontal position and extended as much as a mile into the formation. Small explosions are set off to fracture the surrounding rock, while a high-pressure mixture of water, sand and chemicals is pumped into the horizontal passage to help release the gas.

The process usually costs between $8 million and $10 million per well, according to James Welsh, of the Department of Natural Resources' Office of Conservation, which oversees oil and gas exploration and production.

Before the Haynesville boom began, only a quarter of active natural gas drilling rigs were involved in horizontal drilling. By last October, the percentage had nearly tripled in this country, and shale deposits are being targeted for similar exploitation across Europe and Asia.

Explosion of new wealth

The result of the sudden development of the Haynesville field has been an explosion of new wealth in the Shreveport area and a promise of long-term tax revenue for state coffers.

"The amount of money pumped into the economy from this thing is really pretty extraordinary," said Loren Scott, emeritus professor of economics at LSU. In a report released this month, Scott said the Haynesville shale led to $6.3 billion in business sales and household earnings, 32,742 jobs, and $80.6 million in local taxes and $68.8 million in state taxes in 2009.

A year later, the numbers had skyrocked to $16.3 billion in business sales and household earnings, 57,637 jobs, and $338.8 million in local and $573.5 million in state taxes.

In fact, the boom essentially nullified the expected effects of the recession in the Shreveport area in 2008 and 2009, and offset the recession's effects statewide, Scott found.

"In 2009, the state lost 2 percent of its jobs," he said. "We estimate that if we hadn't had the shale boom, we would have lost 5 percent."

The windfall to state coffers comes in spite of a state exemption on severance taxes. Gas extracted from Haynesville shale is exempt for the first two years of production or until the value of the recovered gas equals the cost of drilling the well, whichever comes first. Scott said most wells are producing so much gas that their exemptions are ending well before the two-year limit.

According to the state Department of Revenue's most recent figures, the exemption will cost the state $266 million, from the beginning of drilling in 2008 through this year, with another $83 million lost to next year's budget.

Officials with the Legislative Fiscal Office remain concerned about the exemption, said chief economist Greg Albrecht, who said Haynesville wells tend to see a drop-off of between 80 percent and 85 percent of production within the first year of operation. That figure was confirmed by officials with Chesapeake Energy, the area's biggest gas producer.

That means that by the time a well's owners must pay severance taxes, the well is generating significantly less taxable revenue.

State regulation of the drilling

Soon after the first wells were completed in 2008, the Department of Natural Resources began receiving complaints from homeowners who said their water-well motors were burning out because water levels had dropped precipitously.

DNR's Office of Conservation quickly "recommended" to drillers that they stop using groundwater for drilling or fracking. That pressure seems to have worked, said Welsh, the office's director.

Welsh insists the state's regulation of drilling during the boom has been effective. The agency routinely inspects drilling sites, with a staff of 16 in its Shreveport office.

The state Department of Environmental Quality also has a hand in regulation, monitoring air pollution and water releases off-site.

Unlike some states, Louisiana does not allow the disposal of either "produced water" -- largely saltwater that can contain minute quantities of radioactive materials from drilling operations -- or used fracking water into surface water bodies or unlined pits, said Chris Piehler, administrator of DEQ's inspections division.

Welsh said the industry has developed methods to recycle water and fracking fluids in response to increased regulation. "They're not allowed to discharge any fluids, so it's cheaper for them to reuse what they've got," he said.

DEQ has received complaints about natural gas seeping into well water. But those complaints actually started 15 years ago, before the beginning of Haynesville drilling, and most can be traced to pockets of gas near the surface that are naturally leaking into aquifers, Piehler said.

"That doesn't mean there couldn't be some shallow-water contamination with the current operations, but it's pretty unlikely to occur from the hydrofracturing process because what's fractured is 12,000 feet below the surface," he said.

A friendly environment

Unlike in the Northeast, there's been a lack of broad opposition to development of the shale gas deposit in northwest Louisiana. That should come as no surprise to those familiar with the Shreveport area, said Keith Mauck, publisher of GoHaynesvilleShale.com and GoMarcellusShale.com, websites that serve as clearinghouses for residents and landowners on drilling issues.

"People in the area are pretty used to the oil and gas industry," Mauck said.

Environmentalists contend it's only a matter of time before problems surface in Louisiana that will be difficult to brush aside.

Last month, the federal Environmental Protection Agency, at the direction of Congress, launched a comprehensive study of the potential impacts of hydraulic fracturing on drinking water sources.

"The most important thing we tell people is that natural gas drilling and drinking water do not mix," said Dusty Horwitt, senior counsel with the Environmental Working Group, which has campaigned against fracking operations in several states. "Drilling should not be allowed near drinking water because there are too many routes for pollution during the entire drilling process.

"Hydraulic fracturing gets the public attention, but there are problems from beginning to end," he said, including spills of diesel and emissions from diesel engines.

Health warnings

In testimony before the state Senate Environmental Quality Committee last March, New Iberia chemist Wilma Subra warned of the potential for residents near wells to be exposed to toxic chemicals contained in drilling muds or fracking fluids -- either spilled onsite as part of mixing operations, when water is pumped back to the surface for disposal, or when it's moved offsite, mostly to be injected into deep disposal wells.

So far in Louisiana, there have been only a few significant accidents associated with drilling and fracking in Haynesville shale. But as drillers move closer to urbanized areas, the potential hazards are becoming more apparent.

In April 2010, workers drilling an Exco Resources well in south Caddo Parish struck pockets of gas just 1,200 to 1,500 feet below the surface. That triggered a blowout that forced as many as 200 families to evacuate their homes, some for several weeks.

A second blowout involving a Chesapeake Energy well occurred in November 2009 near Grand Cane, 35 miles south of Shreveport, killing a Dynasty Transportation LLC employee and triggering the evacuation of nearby families for three days.

The most publicized accident to date involved the death of 17 cows in a field adjacent to a well that was being fracked for Chesapeake Operating Inc., by a team of workers from Schlumberger Technology Corp. in Caddo Parish, about 30 miles southwest of Shreveport.

Both Chesapeake and Schlumberger agreed to pay $22,000 fines a year later as part of a settlement with the state DEQ in which they did not admit to violations of state regulations.

Caddo Parish Sheriff's Office records filed with DEQ, however, support the environmental agency's initial allegations: that fracking fluids leaked from containers on the drilling site and flowed onto the adjoining field, that workers at the site initially denied responsibility despite being found vacuuming the chemicals from the ground when deputies arrived, and that both companies were slow in reporting what happened to the state.

"We gathered all of the Schlumberger employees that worked in the area of the blender and float trailer," said a report by Caddo Parish Sheriff's Office Sgt. Dale Hubbard II. "Collectively, they all agreed that the substances on the ground were not normal, should not be on the ground, but no one admitted to seeing, overlooking or spilling anything on the ground."

"It seemed obvious the cattle had died acutely from an ingested toxin that had drained from the 'fracking' operation going on at the property," said Mike Barrington, a veterinarian with the state Department of Agriculture and Forestry, in a March 2010 memo included in DEQ files.

The owner had to hire dump trucks to haul the dead cattle to his own farm, where they were buried.

Last December, Caddo Sheriff Steve Prator created a task force of state and local emergency preparedness officials to determine how to respond to future fracking incidents.

At the meeting, he warned that, with drilling operations moving closer to the outskirts of Shreveport, a future blowout could force the evacuation of up to 60,000 people.

In his report on the Haynesville, produced for the Louisiana Oil and Gas Association as the association lobbied to keep their tax exemption during this year's legislative session, Scott contends that cheaper drilling costs in the Marcellus shale area and the ability to capture both gas and oil from newly developed shale deposits in south Texas and elsewhere will slow drilling in the Haynesville area over the next few years.

Indeed, Chesapeake already has announced that it is cutting back its Louisiana rigs from 35 to 30 this year, with the others sent to the Eagle Ford formation in south Texas.

But one reason Chesapeake Energy is moving in that direction is because of its new major investor: China, which has invested close to $3 billion in Chesapeake's Eagle Ford operations in Texas, along with shale exploration in Colorado and Wyoming.

China's investments could increase demand for Haynesville gas, Chesapeake officials said. The company signed an agreement with the Sabine liquefied natural gas import facility in Louisiana to export as much as 500 million cubic feet of gas per day. The Sabine facility plans to install equipment to liquefy natural gas.

Part of the reason why the oil-and-gas combination is more attractive to investors at the moment is because the price of oil has skyrocketed -- to $106 a barrel -- as the price of natural gas has been falling, from a Henry Hub spot price high of $13.07 per thousand cubic feet to only $4.27 on Friday. Companies drilling in the Haynesville other shale formations often are required by mineral leases to bring wells to production as quickly as possible, or lose the leases, which will likely keep prices low for several years.

"You have to go out to 2015 before you see a price of $6 on the NYMEX," said Bill Bathe, chief executive officer with U.S. Energy Services.

In the long run, however, Louisiana expects to reap the benefits of the Haynesville formation for a long time, with 10,000 wells expected to be producing by the end of 30 years, Welsh said.

"There's never been a dry hole drilled in the Haynesville shale," Welsh said.